Avoiding Common Contract Pitfalls

One of the problems with dealing with the deluge of laws and regulations is that we can get so caught up in the nuances that we forget to look at the real basic stuff. I was thinking of this yesterday when I came across a recently released decision by New York’s Appellate Division, First Department that underscores one of the biggest potential pitfalls credit unions face and also one of the easiest to avoid. In a nutshell, make sure that your contracts not only have a means of amendment to reflect changing circumstances, but that these provisions are actually utilized when requirements change. This may seem like obvious advice, but according to Judge Saxe “courts are presented over and over again with litigation arising out of circumstances where one party to a contract wrongfully presumes based on past practices that an oral modification will be sufficient.” The case, Nassau Beekman, LLC v. Ann/Nassau Realty, LLC, deals with a major Manhattan real estate transaction where millions of dollars were at stake. But it reflects three mistakes that credit unions and other businesses are sometimes susceptible to, particularly when they establish agreements with vendors with whom they have a good working relationship.

Your contract amendments should not only have a provision requiring that amendments be made in writing, but these provisions have to be followed.

Email is not a substitute for an actual change in the contract’s terms.

The black and white letters of the law in contract terms trump past practice (i.e. the everybody does it defense) any day of the week.

The case that the Judge was clearly exasperated by involved a multi-million real estate transaction, the closing for which was repeatedly postponed by both parties. Eventually, in September 2008, the defendant property owner appeared for the closing but the lawyer for the plaintiff buyer did not. Despite a round of emails demonstrating that the parties had been negotiating, no written modification was made to the contract and six weeks later defendant sent a notice of termination informing the would-be buyers that they were keeping the down payment for breach of the contract.

Now remember all the ensuing litigation could have been prevented had the parties simply reduced whatever agreements they made to postpone closing dates to writing. Instead, the would-be property buyers were left to argue that it was common industry practice for postponement agreements to be made orally and then reduced to writing, that such an oral agreement was made, and that the emails exchanged between the parties were strong evidence of the agreement. All this might be true, but the contract itself stated that contract modifications had to be in writing and New York’s general obligation law codifies this requirement. But what about the email and the subsequent negotiations? While the subsequent action of parties can be used to demonstrate that an agreement was modified, such evidence has to be “unequivocably” related to the contract. Needless to say, this is a very high standard, which brings up one more point: always send your attorney copies of any emails and other communications that you have with a party with whom you are going to enter a contract. This is the best way to ensure that the contract reflects what it is the parties actually agreed to, while potentially saving you lots of money down the road.